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Bahrain’s Shura Council, the upper house of the National Assembly, has voted unanimously to ratify a new agreement on cross-border payments and settlements within the Gulf Cooperation Council (GCC).
Through the agreement, the countries of the GCC aim to launch shared infrastructure for account-to-account transfers and import and export payments between member states.
As noted by lawmakers, this will allow GCC participants to transact with another in local currencies without the need for SWIFT and without the need for correspondent banking protocols.
Last month, MPs in Bahrain voted unanimously to ratify the general agreement. This was followed last week by ratification from the Financial and Economic Affairs Committee of the Shura Council.
After the legislation was approved by the committee, it was then ratified by the Shura Council, a chamber of 40 lawmakers personally appointed by the King of Bahrain.
Finally, before the agreement is signed into law, it must first receive the signature of the Bahraini monarch, King Hamad bin Isa Al Khalifa.
Hesa Al Sadah, an executive director at the Central Bank of Bahrain (CBB), said that five of the six GCC nations have endorsed the agreement, although only Saudi Arabia has finalised all of its legal formalities.
While Saudi Arabia has deposited its ratification documents with the Secretariat General of the GCC, the other signatories have yet to do so.
Once a second signatory deposits its ratification documents with the General Secretariat, those two countries can begin building payment linkages under the GCC framework.
What’s new?
According to the Shura Council’s Financial and Economic Affairs Committee, the general agreement will establish a regional infrastructure for real-time payments and settlements between GCC members.
The new agreement aims to build deeper integrations between financial markets and payment systems, without compromising on security.
Khalid Al Maskati, chair of the committee, said that if Bahrain is the next country to ratify the agreement, it could launch new payment linkages on a bilateral basis with Saudi Arabia.
“The establishment mandate states that two nations can run the system,” he said, as quoted by Bahrain’s Gulf Daily News.
“Saudi Arabia is ready and in a few weeks we too will be ready, and then others can easily join.”
Al Maskati added that the agreement will help GCC members to “cut down” on time-consuming correspondent banking practices, allowing cross-border payments to settle almost instantly, rather than in a matter of days.
Global trend towards payment linkages
In December 2016, the GCC’s Gulf Payments Council founded the Gulf Payments Company, with a mandate to develop new infrastructure to connect the payment systems of GCC members.
This led to the creation of the Arabian Gulf System for Financial Automated Quick Payment Transfer (AFAQ), a linkage of real-time gross settlement (RTGS) systems that was launched in 2020.
Although the Gulf Payments Company is owned and managed by the central banks of all six GCC members, so far only three members — Bahrain, Kuwait and Saudi Arabia — have connected to AFAQ.
Bahrain began onboarding commercial banks to AFAQ in April 2021, a process that was still ongoing in August 2021, according to an official statement.
The Shura Council’s Financial and Economic Affairs Committee said the move towards greater payment linkages within the GCC is part of a global trend.
As covered by VIXIO, other regions, such as India and Southeast Asia, have already forged ahead in terms of bilateral instant payment linkages.
So far this year, an instant payment linkage between India’s UPI and Singapore's PayNow went live in February, and a linkage between Singapore’s NETS QR code and Malaysia’s DuitNow QR code went live in March.
Other regions are also moving in this direction. In October last year, pan-European clearing house EBA Clearing, in partnership with the US-based The Clearing House and SWIFT, launched a transatlantic pilot to link respective instant payment sysetms.
As Petra Plompen, senior manager at EBA Clearing, told VIXIO: "This project offers opportunities for banks to have very predictable and fast, account-to-account payments on a cross-border basis.”
